Read the story here. Advertise at Before It's News here.
Profile image
By Greater Fool (Reporter)
Contributor profile | More stories
Story Views
Last hour:
Last 24 hours:

The hinge

% of readers think this story is Fact. Add your two cents.

US Fed boss Powell caused bond yields to jump by a factor of 6. Tempting?
DOUG  By Guest Blogger Doug Rowat

Anyone who’s played pee-wee hockey in this country, specifically as a defenseman, remembers their coach yelling at them to ‘play the hinge’.

This means ‘swinging back’ when your defense partner’s ‘swinging up’ offensively. Basically, the hinge provides a defensive safeguard.

Bonds in an investment portfolio are similar. They frequently ‘swing’ in a direction opposite (or at least neutral) to equities. However, as many investors are learning this year, the operative word here is “frequently”. Every once in a while, the low-to-negative correlation between bonds and equities evaporates and a more strongly positive correlation emerges.

This year, the reason for this rare, positive correlation is straightforward: red-hot inflation is forcing aggressive central bank tightening, which is lowering bond prices (and therefore boosting yields). At the same time, equity prices are falling because the market fears the tightening may become too aggressive and lead to an economic downturn. There are other complicating factors, of course, including the Covid lockdown in China and the volatility of the Ukraine war, but the above basically summarizes capital markets this year.

However, despite a tough few months, there are many reasons to be optimistic regarding bonds.

First, investors are constantly searching for value and extreme sell-offs often produce just that. The US 10-year Treasury yield, for example, recently spiked to an intra-day high of 3.2%. This is a staggering yield increase as just last summer the US 10-year Treasury yield was barely at half a percent. Half a percent isn’t going to excite anyone, but 3.2% for a very low-risk investment? That becomes more compelling. And if you’re an investor who believes inflation’s peaking and you’re presented with a 6x move in Treasury yields in less than a year, what might be the result? You guessed it: money being moved into bonds.

It’s this emergence of value that consistently causes bonds to rally after sharp sell-offs. RBC shows as much by looking at all the major US Treasury sell-offs since 1987. Sixteen instances in total, and in each instance, the bond market subsequently rallied:

You can’t keep a good bond down

Source: RBC; chart measures subsequent returns following rapid 10-year Treasury sell-offs dating to 1987.

Further, what if the steady stream of 50 basis-point rate-hikes expected by the US Federal Reserve this year doesn’t materialize? Presently, it’s accepted as gospel that the Fed will need continuous (and large) rate increases to tame inflation.

But this isn’t a certainty.

Already we’re seeing evidence of a potential peak in inflation. Indeed the CPI data from earlier this week showed a still-lofty 8.3% y-o-y inflation increase in April, but it marked the first monthly deceleration in annual CPI since last August. And major drivers of inflation—gasoline prices, natural gas prices, used car prices, and so on—are showing at least tentative signs of peaking. The Manheim Used Vehicle Value Index, for example, after skyrocketing for much of the past year, has now dropped for three consecutive months:

Menheim Used Vehicle Value Index – finally, a moderation.

Source: Moody’s Analytics

Naturally, it’s still far too early to conclude that the worst of inflation is behind us, but expectations of aggressive Fed hiking are so embedded in investor thinking that even the hint of a more moderate Fed interest-rate policy would likely be a significant positive catalyst for the bond market. In other words, bad outcomes are heavily priced into the bond market, but good outcomes aren’t.

Finally, sharply positive correlations between bonds and equities rarely last. For example, the long-term correlation between the S&P 500 and the Bloomberg US Aggregate Bond Index, a benchmark of investment grade bonds (mainly Treasuries) is only +0.07—not the +0.50 that we’ve seen since the start of the year. In fact, New York University examined S&P 500 and US Treasury performance going all the way back to 1926 and in only four instances did both asset classes end the year lower. So almost a hundred years of market data suggest that bonds will soon re-establish their more defensive relationship to equities.

Bonds have had a tough 2022, but it almost certainly won’t last. The unique ability of bonds to ‘play the hinge’ will return, and not only will they once again provide good defense, but this time around they likely do some scoring as well.

Doug Rowat, FCSI® is Portfolio Manager with Turner Investments and Senior Investment Advisor, Private Client Group, Raymond James Ltd.


Before It’s News® is a community of individuals who report on what’s going on around them, from all around the world.

Anyone can join.
Anyone can contribute.
Anyone can become informed about their world.

"United We Stand" Click Here To Create Your Personal Citizen Journalist Account Today, Be Sure To Invite Your Friends.

Please Help Support BeforeitsNews by trying our Natural Health Products below!

Order by Phone at 888-809-8385 or online at M - F 9am to 5pm EST

Order by Phone at 866-388-7003 or online at M - F 9am to 5pm EST

Order by Phone at 866-388-7003 or online at M - F 9am to 5pm EST

Humic & Fulvic Trace Minerals Complex - Nature's most important supplement! Vivid Dreams again!

HNEX HydroNano EXtracellular Water - Improve immune system health and reduce inflammation

Ultimate Clinical Potency Curcumin - Natural pain relief, reduce inflammation and so much more.

MitoCopper - Bioavailable Copper destroys pathogens and gives you more energy. (See Blood Video)
Oxy Powder - Natural Colon Cleanser!  Cleans out toxic buildup with oxygen! 
Nascent Iodine - Promotes detoxification, mental focus and thyroid health.
Smart Meter Cover -  Reduces Smart Meter radiation by 96%!  (See Video)

Report abuse


    Your Comments
    Question   Razz  Sad   Evil  Exclaim  Smile  Redface  Biggrin  Surprised  Eek   Confused   Cool  LOL   Mad   Twisted  Rolleyes   Wink  Idea  Arrow  Neutral  Cry   Mr. Green

    Load more ...




    Email this story
    Email this story

    If you really want to ban this commenter, please write down the reason:

    If you really want to disable all recommended stories, click on OK button. After that, you will be redirect to your options page.